Malaysian banks are being pressured to waive three months of interest on personal loans for those in the B50 category (bottom 50% income group) who have opted for the second round of loan moratorium. When news of this latest measure broke the previous week, it was met with diverging reactions — for those expected to benefit, it was a positive surprise but, for banks and their investors, it was understandably negative.

We fully appreciate that the B50 needs more help, as they are disproportionately affected by the pandemic in terms of loss of jobs and incomes, owing to the economic shutdown. Let us be honest, though; the interest waiver is a populist move — it gives the impression of helping millions of lower-income households and, in the process, earning some political brownie points. But make no mistake, this action comes at a very high price — the cost of the fallout will be far higher than the gains achieved.

For starters, it will cast doubt on the integrity of contracts and, once a precedence is set, whether such similar requests will not be repeated in the future. For that matter, will the interest waiver be extended beyond three months? There are now calls to expand the waiver to include small and medium enterprises. Where does it end?

Have we given enough consideration to the long-term consequences and the fact that such a measure will create future moral hazards that may well end up hurting the very same people it is trying to help?

While the total estimated savings for the people, from the interest waiver, might appear large — we estimate it at between RM2 billion ($645 million) and RM4 billion or RM1,150 per B50 household on average — the actual cash-flow assistance today, which is when help is critically needed, is in fact very minimal, less than RM120 over four months! Surprised? You should be. We will show step by step how this figure is derived mathematically and explain why the amount is so small.

The negative impact, on the other hand, is direct and significant. Bank stocks suffered an immediate selloff when the news first hit the market, on Sept 14. Since then, they have lost a combined RM2.8 billion in market cap (up to Sept 20) (see Table 1). This is not surprising — the interest waiver will result in RM2 billion to RM4 billion in profit write-down for the banks this year. Lower profits will, in turn, very likely lead to a cut in dividends — reducing incomes for all shareholders, retail and institutional. Institutional funds such as the Employees Provident Fund — and its more than 14 million contributors — and unit trusts are among the biggest shareholders of Malaysian banks.

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Thus, the drop in share prices and lower dividends create an immediate negative wealth effect for the majority of Malaysians, including you and us, which could very well dampen near-term consumption — just as businesses are reopening.

The impact is also longer term. The profit write-off will eat into banks’ capital and reduce their ability to lend in the future. This hurts all potential borrowers. More importantly, not all banks are affected equally. Those with the biggest exposure to consumer loans and a greater focus on lower-income households would be worst hit. Would these banks be less willing to extend loans to the B50 in the future? As they say, once bitten, twice shy.

The worst thing is, these are precisely the people who need the assistance — for their loan applications to be approved and not at a higher interest rate. The perception of poor credit quality and inability to obtain loans from banks is already forcing many towards illegal money lending businesses, aka loan sharks.

It would be a shame to further disadvantage these people, whom we are trying most to help. And the most effective assistance by banks right now is to extend credit as the economy reopens. The road to hell is, often times, paved with good intentions.

In summary, the call for an interest waiver is short-sighted and irrational, both economically and mathematically speaking. The short-term cash-flow gain is less than RM120 per B50 household — or between RM200 million and RM400 million in total — but the immediate losses for the banks totals RM2 billion to RM4 billion, and may have a negative impact on near-term lending activities.

We are certain that there are far simpler and less economically disruptive ways to achieve the same purpose — and more. A direct subsidy through fiscal policy (or even gratuitously by the banks) instead of foisting the burden onto the private sector banks by compulsion, say a cash handout of RM400 million, will achieve the same cash-flow assistance — and prevent the billions of ringgit losses and untold negative longer-term (permanent) repercussions.

The maths behind the interest waiver

Malaysians were given the option for a second loan moratorium — effective from July 7 for a six-month period — because of the prolonged economic shutdown, owing to Covid-19. During this period, principal repayment is deferred and simple interest (on this principal repayment deferred) will be accrued. It is this amount of interest that is now being waived, for three months in 4Q2021.

It is not entirely clear who constitutes the B50. Our analysis defines the B50 as households with incomes of RM5,000 a month or less. They represent about 49% of all personal loan accounts (in numbers) and 37.9% in terms of the amount outstanding, which totalled RM1,095 billion as at July 2021. Thus, the B50 loan amount affected is about RM415 billion (RM1,095 billion x 37.9%).

We break this total amount down further, into the four major types of loans — housing loans, car loans, personal loans and credit card outstanding — as well as (unspecified) others. Each type of loan carries a different effective interest rate. From these, we then calculate the total monthly interest payments for each loan category. Currently, about 30% of B50 have opted for the loan moratorium. Thus, the total interest savings for a three-month period — if the interest is waived — is about RM2 billion. This is equivalent to about RM1,150 per household account (RM2 billion ÷ 6 million estimated B50 household accounts x 30% take-up rate) (see Table 2).

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We expect the take-up rate for the loan moratorium will rise sharply, from the current 30%, with the interest waiver in place. After all, who does not want an “interest-free loan”? Assuming the take-up rate doubles to 60%, total interest savings will correspondingly double to RM4 billion — and banks, collectively, will suffer the same amount of losses, which will be reflected immediately in their profits, in 4Q2021.

So, an interest savings of RM2 billion to RM4 billion for the B50 is a huge headline number, yes? But, the devil, as we all know is always in the details. The loan moratorium basically works like a loan restructuring such that the deferred payments (principal repayment and interests) during the sixmonth moratorium are moved to the end of the loan tenure. That is, the loan maturity is stretched out into the future, beyond the original end date by about six months. For example, if your loan is originally scheduled to end in Year 4, it is now extended by six months into Year 5.

We derived an ageing profile for all the four main types of loans, by the number of months remaining for each — based on the actual banking sector disbursements by loan types. As one would expect, housing loans have the longest remaining months, estimated at 125.5 (weighted average) and credit card debts, the shortest, at 3.6 months. The weighted average maturity for car loans is 58.4 months and personal loans, 42.9 months (see Table 3).

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What this means is that, effectively, the bulk of the savings from the interest waiver will be realised only many, many months or years down the road — in terms of actual timing of cash flow. In other words, the interest waiver is a very poor tool if we are trying to help the B50 by improving their cash flow today. Of the estimated RM1,150 savings per household, only RM120 (for credit cards) will be realised within the next 3.6 months.

This RM120 is the actual amount of cash flow each B50 household will gain — to alleviate their immediate needs. To be sure, our figures are broad estimates — only the banks will have the accurate number. But we think they are generally correct — and Bank Negara Malaysia can verify or improve on our estimates with more precise numbers. We are confident it would not change the conclusion — the immediate cash-flow gains for the B50 pale in comparison to the cost and damage to the banking sector, the overall economy and financial system. In fact, the interest waiver is anachronistic to the larger reform efforts, to revitalise market forces to generate growth, jobs, wealth and investments.

The interest waiver, though popular, is a very inefficient tool to help those in need. It is, in our view, irresponsible populism. And, in reality, it is not very helpful either. Perhaps it is timely we are reminded of a quote from our former prime minister, Tun Hussein Onn: “I would rather do the right thing and be cursed than do the popular but wrong thing and be applauded.”

The Global Portfolio fell 1.6% for the week ended Sept 22, mirroring the broader market selloff. The big losers were The Walt Disney Co (-5.8%), Adobe (-5.3%), and Taiwan Semiconductor Manufacturing Co (-4.6%). At the other end, ServiceNow (+1.6%), Builders FirstSource (+1.6%), and Singapore Airlines (1.2%) were among the notable gainers last week. Total Global Portfolio returns since inception now stand at 61.9%. This portfolio is outperforming the benchmark MSCI World Net Return Index, which is up 56.1% over the same period.

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Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

Interest waiver on loans … who does it really help?

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